Environmental, social, and corporate governance (ESG) is a phrase heard more and more in boardrooms, investor circles, regulatory offices, and even living rooms in recent years.
Increasingly, ESG compliance scores are the standard by which companies are judged for investment, compliance, partnerships, and even sales. But on what basis do consulting groups and financial advisors arrive at these scores? On what data do automated ESG monitoring services base these all-important rankings – rankings that can literally affect business continuity?
In this post, we’ll take a deep dive into ESG data sets, ESG data management, and why web data provided by our News API is one of the most valuable alternative ESG data sources today.
What is ESG?
ESG is a strategic framework that helps outside entities assess an organization’s internal objectives, practices, and baselines. ESG encompasses an organization’s:
- Environmental commitment – Environmental responsibility, commitment to sustainability, and impact on the environment including carbon emissions and footprint, energy usage, waste, and more
- Social commitment – Internal workplace culture, employee satisfaction, retention, diversity, workplace conditions, and employee health and safety
- Corporate governance – Compliance, corporate culture, pay ratios, company ethos, and transparency and accountability in leadership
ESG has become increasingly central in evaluating an organization – for customers, for regulators, and (especially) for socially conscious investors. These key players look carefully at an organization’s ESG rating or score – making this stat top of mind in the c-suite, as well.
What are ESG ratings and ESG data?
ESG ratings are created by ESG rating agencies like MSCI ESG, Sustainalytics, RepRisk, and others. Each agency uses its own methodology, weighting, metrics, and ESG data sets – making ESG ratings a subjective science, despite the centrality and importance of these ratings to organizations and investors alike.
ESG ratings depend largely on ESG data – data reflecting how well a company meets its environmental, social, and corporate governance goals. Measuring and reporting ESG data is the way that companies try to establish transparency, build trust, and enhance accountability – helping them attract investors, employees, and customers.
Yet since ESG compliance still isn’t mandatory and reporting isn’t yet regulated (although the SEC has proposed rules to regulate ESG disclosures), ESG agencies lack access to structured ESG data. As opposed to, for example, SEC-mandated financial reporting data – there’s simply no standard ESG reporting format to enable effective comparisons across industries and organizations. This means that reports provided by companies themselves are considered insufficient for ratings, and ESG agencies need to draw on alternative ESG data sources.
What happens when ESG data management falls short
A recent survey found that 85% of investors, including 91% of institutional investors, consider ESG data sets more important than other company data sets when making investment decisions. Nearly 80% of institutional investors think that building ESG into a company’s business model is smart business. What’s more, investors expect ESG reports to include how ESG data is tied to business impacts.
This places the onus on companies to back up their claims with reliable data and exposes them to risk if they cannot. And these risks are far more serious than they were in the early days of ESG reporting. Once upon a time, getting caught “greenwashing” would result in bad PR. Today, ESG data drives business decisions. Bad ESG data can lead to inaccurate reporting, lack of transparency, and potential backlash from stakeholders. Poor ESG metrics, based on poor ESG data management, can make it tough for companies to attract investment if liabilities are considered too high. And in a competitive job market, attracting talent is complicated if potential employees see poor ESG metrics.
Finally, bad ESG data sets will soon be both a financial and legal liability. As mentioned above, the SEC has proposed rules to regulate ESG disclosures, along with penalties for non-compliance. Moreover, the environmental provisions of the recently-enacted Inflation Reduction Act dictate steep fines for violations of various ESG-related standards like emissions. This is why many companies have already integrated ESG data and ESG data management into their regulatory compliance risk management procedures.
Three reasons ESG data collection is important
Society as a whole has begun to appreciate the undeniable linkage between business practices, social inequities, and the environment. Today’s investors simply expect responsible corporate behavior – behavior not solely driven by profit, but rather driven by an appreciation of the impact of profit, as well. ESG ratings or scoring empower investors to judge:
- Potential returns from established companies – It’s not unreasonable for investors to expect higher returns and better stability from companies with high ESG scores. Focus on consistent improvement of ESG data sets is an indicator of a well-run, and consequently more profitable, organization.
- Potential returns from new companies – Competition for seed and early-round investment is intensifying. ESG data management and scoring helps potential investors evaluate and choose where to put their money.
- How much companies care – Profits aside, investors feel genuine concern for environmental and social issues, and sincerely seek to control their impact on the future of society and their surroundings.
The biggest challenges to collecting relevant ESG data
According to Ernst & Young, the collection of quality alternative ESG data remains a major ESG investing hurdle. Contradictory ESG ratings, conflicting ESG taxonomies, and inadequate disclosure of ESG risks – all these are the inevitable outcomes of poor ESG data sets. According to E&Y, the biggest challenges to collecting relevant ESG data are:
- Data suitability – Publicly available sources of nonfinancial data are only disclosed once or twice a year. This makes ESG-related data from official sources insufficient for an up-to-date ESG assessment by investors.
- Data accessibility – Much nonfinancial information is presented in either narrative or unstructured form. ESG rankings agencies struggle to develop and maintain a usable ESG data architecture.
- Data consistency – Since ESG spans both financial and nonfinancial domains, conflicting ESG taxonomies and varying national identifiers established by individual governments often use contrary definitions – making consistent ESG insights hard to obtain.
Webz.io’s News API can help
To maximize ESG insights and minimize efforts, it’s best to leave the ESG data collection to the experts. Webz.io’s News API constantly consumes news data from millions of sources, in more than 170 languages from across the web, and includes 50TB of historical data dating back to 2008.
Webz.io also offers additional APIs that provide the full scope of ESG-related mentions including blogs, forums, and review sites. Moreover, our Gov Data API allows you to generate feeds of the latest government rules, regulations, ESG data, and more – delivering specific, dependable ESG data from official sources in real time.
Webz.io’s advanced platform uses NLP to distill the meaning and sentiment behind every article, story, and image – in near real-time. This data is structured and enriched to make it quickly and easily readable by media intelligence platforms. The end result: better ESG insights based on better data.
To see how Webz.io can help you maximize ESG insights with quality web data for your organization, talk to one of our experts today!
